Economic measures in the water sector

Economic measures in the water sector
ENTRY DATE: 18 November 2013| LAST UPDATE: 18 November 2013
Categories: Water Resources | Economic measures
Technological Maturity: Demonstration phase and ready to be applied
Technology Owners:

European countries and others

Needs Addressed

The need to reduce the impacts of deteriorating quality of public waters as a result of climate change, in areas that may face declining sanitation conditions (particularly the need to mitigate non-point source pollution). 

Adaptation Effects
  • Limiting the deterioration of water quality in public water sources due to the effects of climate change, etc.
  • Prevention of deterioration of sanitation conditions and reduction of disease risk due to climate change 
Overview and Features

Economic measures use market mechanisms to achieve policy objectives by inducing behavior based on economic rationality of actors through the granting of economic incentives. Stated another way, by creating a system that gives actors monetary benefits (or losses) for behavior that has a positive (or negative) impact on the environment, that behavior can be encouraged (or discouraged). Economic measures could include taxes and surcharges, subsidies, emission trading, deposit refund systems, and so on. This document introduces economic measures in the water sector, particularly taxes and levies, as well as water quality trading, for which examples already exist in Europe and other regions.

(1) Taxes and Surcharges

  • Taxes and levies are charges imposed on behavior that has a burden on the environment, such as the emission of pollutants. 
  • An effluent surcharge system requires the payment of a surcharge depending on the volume of pollutants discharged. Such a surcharge is imposed only on point-source pollution. It is not imposed on pollution from non-point sources because of the difficulty of monitoring. 
  • Such a system had been introduced in 39 states in the United States by 1993, and although the rate structures vary, surcharges are being collected from emitters that discharge effluent directly into water bodies. In Europe, 23 countries have introduced effluent surcharges, and four countries have introduced taxes on agricultural chemicals. 

(2) Water Quality Trading

  • Under water quality trading systems, a quantity of total emissions of pollutants from each emission source is established, and an emission quota (permit) is allocated to each emission source. Emission sources are permitted to buy and sell permits, and in cases where actual emissions are greater than the emission quota, emissions are permitted to exceed the maximum quantity by purchasing permits. Meanwhile, if actual emissions are less than the emission quota, a permit can be sold. 
  • The United States was early to introduce emission trading through its Clean Water Act, which made it mandatory for a point source emitter to acquire a permit to discharge effluent into a water body, and which established unified national regulations for wastewater in each industry. For point source emissions into water bodies, the legislation also established maximum emissions through what is called the total maximum daily load (TMDL), for when water quality standards were exceeded. In contrast, permits are not required for non-point sources, and there are no maximum emissions for each emission source, even in water bodies where a TMDL has been established. 
  • As one classification of water quality trading, categories depend on the type of emission source. Point source trading is trading among emitters who have an emission limit, whereas point-source/non-point-source trading is a system in which a point source emitter makes a monetary payment in order to acquire the reduced portion from a non-point source. 
  • Today 26 water quality trading systems exist around the world. In 2008, 22 were in the United States, three in Australia, and one in Canada. As for Japan, with the amendment of the Sewerage Act in 2005, the government introduced a burden sharing system for advanced wastewater treatment. Under this system, if a sewage treatment plant reduces nitrogen or phosphorus emissions by more than a target amount, another municipality bears a portion of those reduction costs. This system does not put pressure on a waste treatment plant to reduce its own emissions, but in fact there have been no examples yet of payments having been made under the system. 
Considerations (technology transfer criteria, challenges, etc.)

Water Quality Trading for Farmland and Other Non-Point Sources 

  • Environmental regulations are essential (stringent emission reduction regulations are necessary for point sources)
  • The agricultural sector should be involved in discussions from the design stage of the system. 
  • Consider adopting frameworks similar to existing agricultural and environmental policy.
  • Consider the existence of intermediaries (face-to-face or direct transactions are not conducted in water quality trading)
  • Consider also benefits other than cost reductions.
Co-benefits, Suitability for Developing Countries
  • Water quality improvements can be achieved efficiently by these measures, which have a high benefit to cost ratio. 
  • Increased awareness about conservation of the water environment. 

Case Study 1: Water Quality Surcharge (California)

This system was introduced with the objective of covering the issuance of emission permits and project costs of water quality monitoring. The water quality surcharge is determined through a calculation of a base charge plus unit price multiplied by the permitted effluent quantity. To this is added a surcharge at a fixed rate as the water quality monitoring cost.

Case Study 2: Effluent Surcharge (France and the Netherlands)

This surcharge was introduced with the objective of securing a source of funds for water quality conservation measures, such as the cost of maintenance and management of wastewater treatment facilities. The collection of surcharges is performed in France by a water management agency established in each water basin, and in the Netherlands by the national government or a water management association. The system in the Netherlands has been recognized for creating the incentive for emitters to reduce their emissions, as the charges have been set adequately high.

Case Study 3: Surcharge for Irrigation Water (California)

This surcharge on non-point source pollution differs from surcharges on point-source pollution. Because it is difficult to directly monitor/measure emission quantities, the charges must inevitably be applied to something other than the quantity of emissions. Thus, the charges are applied to quantities such as the fertilizers and pesticides used. In the state of California, heavy metals on farmland are contained agricultural runoff that flows into rivers. The impacts on ecosystems are seen as a problem, so the state collects charges (gradually increasing system) on irrigation water, and also promotes water conservation.

Case Study 4. Water Quality Trading (Great Miami River, Ohio State)

Agricultural land uses account for 70 percent of land area in the Great Miami River basin. The Miami conservancy area created a trading program centering on the Miami conservation area. Benefits of this trading program are that, compared to the introduction of advanced treatment methods to wastewater treatment plants, policies targeting farms would bring benefits other than water quality improvement (for example, the conservation of wildlife habitat, reduction of flow velocity, and reduction of energy consumption, etc.).

This system takes the form of a reverse auction, in which proposals for countermeasures are solicited regularly from farms, and from among the proposals received, a selection is made by prioritizing those that can reduce phosphorus emissions at the lowest cost per pound. Six auctions had been conducted by 2009, with 99 proposals having been selected, resulting in more than 380 tons of phosphorus reduced, and total payments of 1.1 million dollars (equivalent to about 3.3 dollars per kilogram). 

Information Resources

Ministry of the Environment FY2011 Policy Research on Environment and Economics, Research relating to the Benefits and Social Impacts of Policy Mixes Including Economic Measures in the Water Sector, Final Research Report (Kyoto University, Hiroshima University, The University of Tokyo, Hosei University, Toyo University, Shiga University, Shiga Prefecture Lake Biwa Environmental Research Institute, 2012) (in Japanese)